REO-to-rental securitisation market may be closer than expected

Jan 29 (IFR) - The concept of securitising the rental income
from a portfolio of leased homes is gaining ground at a faster
pace than expected, and the first so-called real estate owned
(REO) to rental securitisation deal could hit the primary market
by 2015.

That's the view of Gary Beasley, managing director at
Waypoint Homes, a company that invests in REOs. Beasley made the
comments at a panel discussion during the American
Securitisation Forum conference in Las Vegas.

"The market is growing faster than anyone imagined," said
Beasley. "There's a chance that this can be a large asset
class."

Beasley is expecting a handful of multi-billion dollar
public real estate investment trusts (REITs) dedicated to
investing specifically in the burgeoning REO-to-rental business
to emerge by year end, up from zero just a year ago, he said.

That would indicate that a significant securitization market
may eventually be based on the product, and that it may come
about sooner rather than later.

"It may take two to three years instead of five years,
because of the significant capital inflow," he said.

The concept of REO-to-rental securitisations has been widely
discussed in recent months with even rating agencies weighing in
on the subject last August.

Interest in the deals is growing because of the large
inventory of single-family foreclosed properties held by
financial institutions.

In the planned deals, real estate investors would buy up
blocks of foreclosed properties and rent them out to borrowers
who were displaced by their own inability to pay their mortgage.
The rental payment streams - and possibly the proceeds from
eventually selling the property - would provide payments to bond
investors.

Last year, rating agencies said the main risks involved in
assigning a credit rating to such a deal are of the
operator/manager of the properties not being able to perform his
duties, and the potential variability of cashflow from the
rental and ultimate sale of the properties.

Panelists at the conference touched on those issues and
debated whether firms view the REO-to-rental industry as a
"trade" or as a "business". That is an important distinction, as
it can reveal whether investors buying up homes were deciding to
integrate or outsource property management and operations.

Frank Terzuoli, a director at KPMG, said that property
management could be expensive. For example, in Florida,
single-family homes are so cheap to buy, that fixing a roof on
such a home can be more costly than the house itself.

Terzuoli also said that most renters want to become
homeowners, so eventually they will leave, causing issues for
the cashflows that may underpin a securitisation.

But Beasley said confidence was growing in the product.

"A year ago the idea of lending against a portfolio of
leased homes was really a foreign concept," he said.

The market has evolved very quickly, with many firms now
able to understand the asset and structure.

"Competition is ferocious now."

Ryan Stark, who oversees RMBS at Deutsche Bank, said that
bond investors just want to see well-structured deals, and have
expressed interest in an ABS backed by REO-to-rental cashflows.
They have been curious about the structure and tenor of such
potential transactions.

Stark has had to explain to them that if a deal were to
happen, it would not be as commoditised as other residential
real estate transactions.

Until a securitisation actually happens, many Wall Street
banks are providing lines of credit to REO-to-rental aggregators
such as Waypoint and Colony Capital.

Citigroup and Deutsche Bank have been most
active in extending credit to these investors but panelists said
almost all major banks are now involved in financing the nascent
asset class.

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